Virgin Mobile

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AEM 4160: STRATEGIC PRICING PROF.: JURA LIAUKONYTE

VIRGIN CELL CASE: EXCERCISES

Pricing Structure from the Carrier Perspective
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Contracts:
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Annual churn rate WITH contracts Annual churn rate WITHOUT contracts The difference:

=2% * 12 months = 24% (p.8) =6% * 12 months = 72% (p.8) 72% - 24% = 48%

Take AT&T example: customer base = 20.5 million If AT&T abandons the contract based plan how many new customers would it need to acquire to offset customers from an increased churn rate?
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Additional customers lost to churn: Acquisition cost per customer: Total cost of offsetting higher churn rate:

48% * 20.5 mln = 9.84 mln $370 (case p.2) $370 * 9.84 mln =$3.64 bil.

Not surprising that major players still continue to hold the contracts.

“Menu” pricing: Actual Usage

Bucket/”Menu” pricing
In reality most consumers are paying more than their optimal rate = if they new exactly how much they will consume ¨ “industry makes money from consumer confusion” ¨ Pricing menus allow carriers to advertise low per minute rates ¨ But most consumers end up choosing the wrong menu.
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Hidden Fees
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Able to promote low per minute prices, but still collect additional revenues

Acquisition costs
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Advertising per gross add: from $75 to $100 (p.5) Sales commission paid per subscriber: $100 (p.5) Handset subsidy provided to the subscriber: $100 to $200 (p.9) Total: from $275 to $405
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(let’s assume somewhere in the middle = $370)

Break Even point
Monthly ARPU (average revenue per unit): $52 (p.3) ¨ Monthly Cost-to-Serve: $30 (p.3) ¨ Monthly Margin: $22 ¨ Time required to break even on the acquisition cost = $370/ $22= 17 months ¨ In the cellular industry the monthly margin is relatively fixed across periods, therefore the traditional LTV can be simplified (assuming infinite horizon):
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LTV =

M

1-r+i

- AC

M = margin the customer generates in a year